Liability Traps During day-to-day Business of the Company

The CEO has extensive duties to observe during normal ongoing business. We have listed the most common duties.

  • sweeping clause: duty to duly lead the company,
  • certain payments to shareholders,
  • activities towards creditors of the company,
  • tax duties,
  • forwarding social security premiums,

They all will be introduced further below.

 

What about the company’s funds? May I not spend the capital stock to finance assets for the company?

One of your major and core duties towards the company is to maintain its liquidity. Therefore, §30 I 1 GmbHG determines that payments against the capital stock may not be forwarded to the shareholder. If this rule is violated, you will be liable to the company (§43 III GmbHG).
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My shareholder is asking for a loan from the company and I am to nod that off. I am reluctant as the shareholder is financially pretty week.

That is generally a good inclination to be careful – especially with shareholders. Some shareholders erroneously believe company funds are their own. The question “if” to give a loan is beyond your competence. However, it is one of your important duties to check if the debt can be repaid at any time or if there are means for securing the loan. A violation constitutes liability for damages towards the company pursuant to §43 II GmbHG.
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Warding off one shareholder, the other one comes in and also needs a loan – as if I had nothing else to do. But this one is really crazy! He wants a loan of three times the annual turnover. If that happens it will kill the company and I will lose my job in the end. Argh. What am I to do?

Simple! Deny the loan. Why? Any payment that leads to bankruptcy of the company (§64 cl 3 GmbHG) is forbidden. This liability will not be towards the public but to the company. It is important to collect as many documents as possible in regards to such an approach. These documents are to show the financial status of the company and at best of the requiring shareholder’s personal financial status. Collect such information that can exempt you and save it at home!
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I arranged a contract with a supplier for the company. Unfortunately everything went wrong and the contract was spoiled. When I say everything, I really mean everything! This idiot of supplier is telling me that I have to bail them out for their damages just because my company’s letterhead was insufficient.

Though this might sound awkward but never forget Germans love formalities! This is another typical example for the German’s desire to have everything correctly and meticulously detailed. This problem is actually based in the law of agency. You are to clearly communicate who exactly you are representing. In German understanding it is a significant difference to say „Peter Pan Airliners” and “Peter Pan Airliners GmbH”. It is the difference between a physical person and a juristic person. This rule applies to emails, faxes, and just any kind of “manifested” correspondence.
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Isn’t the company supposed to be liable for taxes? I don’t see why I have to have any worries.

Don’t ever forget, the company, as a juristic person, is only a fiction. The company acts via a physical person, the managing director (= legal representative). As a very basic legal rule, it is always the person who acts that is responsible. You, as the CEO, are to make sure that the tax returns are submitted and paid on time – as well as wage tax payments and social security premiums. Practically the greatest trap for a CEO is in times of illiquidity to just withhold wage tax and pay the full salary to the employer. (§69 AO)
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Well, heck what am I to do to if my company is in a liquidity crunch and it cannot pay all costs right now? Though I would love to refrain from paying the taxes but from what you say that is not a good idea.

If this liquidity crunch is a “one-timer” then just pay wage tax, social security and remains after that to the employee. Be sure to discuss this in advance with your employee to maintain his solidarity. If your company is still a good ways away from bankruptcy, you can negotiate to reduce the wages. This will reduce the tax burden.
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Okay, I have the liability to forward social security. So what? If I can’t pay, I go bankrupt or leave the country. What are the consequences?

To start with the worst first, you will be subject to criminal prosecution pursuant to §266a I StGB – imprisonment not exceeding five years or a fine. If you want to defend using any excuses, virtually forget it! You actually have no chance to defend yourself against this prosecution!! German authorities show no mercy or pity when the social system is touched. Next to that there is also a civil law liability for damages based on §823 BGB i.c.w § 266a StGB.
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After an audit in the company, the shareholders wanted me to refund the company for VAT and default interest because of incorrect invoices I let issue. That can’t be true, can’t it?

Such is imaginable because one of your main duties is to correctly issue invoice not only by what is sold but also with the correct VAT percentage. Admittingly, you cannot know everything but then you have to get the correct information.
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I heard it through the grapevines that a colleague was held liable from contractual partners of his company for not having reported a change in the persons of the shareholders and their shares. What does that relate to?

This relates to your duty pursuant to §40 I GmbHG to report any changes in the corporate structure to the commercial court, the Amtsgericht, of registration. In case the shareholders act independently from you to organize a notary, you will not be held liable for any damages if you were not correctly informed §40 III GmbHG.
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